TCM Bulletin ABC

TCM BULLETIN ON ACTIVITY BASED COSTING (ABC) CII - TCM Publication Issue No. 2 August 2002 Traditional Costing Costs Consumed by Products Traditional Costing Vs Activity Based Costing Activity Based Costing Costs Consumed by Activities Consumed by Products In this issue, we will look into understanding ABC : SPECTRUM OF TCM TOOLS Target Costing Supply Chain Management Activity Based Costing Strategic Cost Management Activity Based Management ABC - The Road to Cost Management Introduction It is said ‘If you can’t measure it, you cannot manage it’. Costing, being at the core of performance measurement of an enterprise, necessitates a systematic and structured approach, with the aim of providing a holistic framework to manage the costs, this initiative is called Total Cost Management (TCM). TCM can also be defined as the process of managing the financial outcome of activities, internal and external to the organisation, to support efficient and effective decision- making. Tools & Techniques of TCM TCM uses various techniques and tools that pervad e the organisation, right from the supplier to the end consumer and include the after sales service. Its objective is to improve the profitability without sacrificing the value for the customers. Chairman’s Message I am happy to note that CII TCM cell is bringing out this issue to improve the awareness and knowledge on Activity Based Costing (ABC). I am sure that this will highlight the advantages of using AB C fo r st ra te gi c an d op er at ional applications in industry. I would request those firms and individuals practicing TCM to contribute articles to this Bulletin, so that others can benefit from the same. Narayan Sethuramon Chairman, Total Cost Management Cell, CII What is ABC ? Activity based costing is a method that measures cost of a product/service, based on the activities performed to produce the product/service. The underlying assumption is that activities drive the cost, which are driven by the product or customer. This radically differs from the conventional costing systems, which is built on the assumption that product drives the cost directly. ABC system drives indirect an d support expenses, first to the activities & processes and then to products, services and customers, giving managers a clearer picture of economics of their operations and services Why ABC ? The insight brought in by ABC methodology can be broadly categorized as : Customer Profitability Product Profitability Process Efficiency Customer Profitability Traditionally it is believed that: High volume customers are profitable customers Loyal customer is also a profitable one Profits will follow a happy customer. The ABC studies on customer profitability have unveiled that the above are often exceptions . With the costing based on activities, the cost of serving a customer can be ascertained individually. Deducting the product cost and the cost to serve each customer one can arrive at customer’s profitability. This method of dealing customer cost CII - TCM Cell : Leader in TCM Movement

TCM Bulletin ABC

Documents

Transcript of TCM Bulletin ABC